A lot of interesting ideas are being floated about how the coronavirus crisis will affect our future habits and social patterns.
Some that I have come across lately that relate to the housing market and real estate include the idea that prospective home buyers will be looking for larger homes to accommodate the possibilities of working from home and/or homeschooling.
Another prognostication is that the commercial real estate market will pick up because business owners will need more space to accommodate the same number of workers judicially spaced to prevent cross-infections in the work environment.
I don’t think it is a coincidence that both these ideas, if they come to fruition, would be better for real estate sales – and for that reason, I caution “believer beware!”
Humans are, by nature, not rational agents. We are susceptible to many cognitive biases, including what Daniel Kahneman called “What you see is all there is.” According to this, humans have a tendency to make judgments based on the information that is available without considering what information is missing.
The two predictions that both home size and office space will increase due to our experience as a nation with the coronavirus outbreak are based on the assumption that the prospect of a viral outbreak is the only factor a buyer considers when determining what size home or office space will be acceptable.
In fact, the median square footage for single-family homes has been increasing since the 1980s. The average one family size home went from 1500 square feet in 1975 to 2689 in 2014. During that time average family size decreased – so it was not the family size that was driving the increase.
When mortgage rates began to fall after 1996, developers, to maximize profit per sale, started to push more large homes. This also increased the price gap between new and existing homes. This price difference was the main reason why new homes had the weakest demand ever during the recovery, even with mortgage rates at historical lows in the longest economic expansion ever recorded in history.
To recapture some of these sales, builders have been offering some smaller new homes in the mix. Since 2014, the average square footage of a new single-family home decreased to 2465 square feet in Q4 of 2019. Changes in average home size are driven by affordability. When mortgage interest rates fall and buyers can afford larger homes, they buy larger houses.
During recessions and recoveries, when financial stressors are forefront in the mind of the consumer, buyers will choose less expensive, smaller homes. With all this additional information in mind, I do not expect the average home size (see chart below) to increase as a result of this health crisis.
Let’s now consider the prediction that commercial office space will increase to accommodate more space between workers. My personal experience is that businesses are taking a two-pronged approach to address the safety concerns of maintaining business operations during the coronavirus crisis. Essential workers are wearing masks, observing social distancing and limiting face to face interactions in the office environment. Those who can conduct their work from home are doing so.
This approach is a stop-gap measure with unknown long-term consequences for business productivity. The trend to work from home has been growing since 1980 – but very slowly, reaching only 3% by 2016 (see graph below). The coronavirus may accelerate this transition. A hurdle that must be overcome for this to happen is a change of mind by business leadership.
The idea that a distributed work environment can be as or more productive than a traditional office environment does not have universal buy-in. For most CEOs, the jury still is out on how productive workers are when they work from home. Before the coronavirus, those working from home tended to be in the higher paid, technical positions (see graph below).
Jobs such as these have easily measured productivity (for example, the number of contracts reviewed and executed per week). Jack Dorsey, the CEO of Twitter, recently told his employees that they might be working from home forever.
If you are running a tech company, this may make sense. If nothing else, the reduced overhead expenses of not having employees on campus must be enticing. But most jobs are service jobs where output and productivity are less quantifiable.
Another potential consequence of the work-at-home model being more widely adopted is that businesses can hire people from all over the world and transition to multiple asynchronous work cycles. If you don’t need to be in the office, then you can be anywhere.
While there are still many hurdles to convert the traditional office environment to a distributed one, it does seem to be the future of the work. Increasing office space as a way to keep workers safe from each other seems to be in the same realm of banging rocks together to start a fire.
We, as a nation, have endured many calamities, and for the most part, the adjustments we made in our behaviors as a result of those experiences have been modest. Many predicted that air travel would forever be significantly impacted after the 9/11 tragedy because people would be too afraid to fly.
But before coronavirus, the only concessions passengers made for air safety were taking off their shoes before going through security (but only if you didn’t have TSA pre-check privileges) and not packing liquids in their carry-ons. And there has been endless whining about these small changes.
The Spanish flu wreaked havoc on the U.S. economy, and many predicted it would lead to a decades-long recession – but instead, the pent-up demand to spend and enjoy life spurred the roaring 20’s. No one has a crystal ball to tell the future. But we do know that cultural change is usually slow, methodical, and the result of many social inputs. The accuracy of any prediction is incumbent on capturing as many of those input as possible and avoiding the cognitive bias of “What you see is all there is.”